Why do people speculatively trade options contracts

This is why warrants are the devil's stuff

Banks make good money by issuing warrants. You also? I bet against it! Here you can find out why and why you are being systematically ripped off.

It sounds so great. Little capital investment, a lot of income. The (theoretical) return opportunities that warrants can bring you quickly exceed 100%.

But what risk is this opportunity associated with? And why do 90% of private investors burn their capital with warrants?

Everything in order…

If you want to trade independently on the stock exchange and are dealing with the topic for the first time, you usually choose an investment fund or a share for your first investment.

For lack of experience, many small investors reasonably take a small amount of between EUR 500 and EUR 5000 for their first equity investment.

When choosing, they rely on a comment from a trained economist (the man has studied, so he should know ...) and buy based on the newgreedde go blind.

After a few weeks and a profit of around € 75 (luck is with the stupid) they get impatient and sell the shares for a small profit.

Something more promising is needed!

So the young investor goes to the financial website he trusts and searches the “Leverage Products” menu.

From a TV interview with a German private banker, he knows what great return opportunities warrants offer!

He can thus "trade up" the 1000 € capital investment much faster to 2000 € than with the boring share.


Trading warrants: And now the fun begins ...

Our greenhorn uses the website's search function and can no longer see the forest for the trees.

Should it be a classic or a discount OS? Maybe an OS on the DAX or would you prefer a single share?

Once these segments have been selected, the next step is to select the issuer, the spread, omega (leverage), maturity, etc.

Newcomers in particular do not deal sufficiently with the individual components and actually do not even know how a warrant works.

But there is great greed: “The main thing is that there are high potential returns and that in the shortest possible time”, is the motto.

Above all, the subject of "time" plays a special role with warrants!

Warrants have a so-called time value, which falls exponentially with increasing (remaining) term. The time value is expressed using the Greek “theta”.

A weekly theta of e.g. -0.08 then means that this note loses 0.08 euros = 8 cents if the base value and the interest rate did not move at all for a week.

The theta has to be put in relation to the current course of the OS. Especially with a short remaining term, a high leverage is attractive, but a weekly theta of -0.08 has an enormously negative effect on an OS rate of e.g. 0.25 EUR.

Because after a week the note (again assuming no or only very low volatility) is then only at 0.17 EUR, although the price of the underlying has not actually fallen at all.

This scenario is still easy to understand and as a trader you can already take it into account by making a clever selection.

But what makes warrants ultimately unpredictable "devil stuff", I will now explain to you in the further course.


The pitfalls in warrant trading:

There are a few facts why you shouldn't be trading warrants.

  • The issuer plays with the spread

Even if you have a small spread between the buying and selling price (e.g. 1 cent) when buying, that doesn't mean that it will always stay that way.

It is up to the provider, i.e. the bank, how and when the spread is changed. And if the market situation develops unfavorably, then you can be poisoned that he will vigorously widen this spread.

Only you have the disadvantage.

  • A volatile sideways phase reduces the price of the warrant

Example: The price of the underlying asset falls over several days, only to then rise again and roughly reach the starting level.

Your OS will be in the red with a high probability, although the base value is again at +/- 0.

Implied volatility is important. It is determined by the issuer, or rather: estimated.

Strangely enough, the issuers have a free hand to change the price of each warrant at will by setting the implied volatility high or low.

Basically, the higher the issuer applies the implied volatility, the more expensive the corresponding warrant and vice versa.

  • The issuer can go bankrupt

As with all certificates, the warrants are also assigned to the category of bearer bonds.

In the event of the bank's insolvency, as the issuer of the notes, no deposit insurance applies.

  • Warrants are banned in the United States

In the motherland of stock exchange trading, warrants are simply forbidden. I wonder why?

In the USA, private investors mainly trade options that are much more transparent.

Two advantages are obvious:

  1. There is no risk of bankruptcy
  2. The possibility of manipulation on the part of the bank is largely excluded

Of course you can also generate a decent return with warrants and, as is so often the case, every blind hen will find a grain here.

In trading, however, the risk-reward ratio plays a very important role. If I look at the points mentioned, then in no single constellation do I have a positive risk-reward ratio.



I advise every private investor who has not been familiar with the issue of warrants for years to give preference to other derivatives.

For the reasons mentioned above, there are simply too many pitfalls that are also legally permissible.

All derivative financial instruments have their advantages and disadvantages and must correspond to the respective trading style, risk and money management and personal goal.

Instead of warrants, you should deal with options, knock outs or CFDs. Here you can find an article about trading CFDs (no, CFDs have not been banned by BaFin).

These variants are no less speculative, but have greater transparency and are therefore more predictable.

And if you already had the right nose for the development of the underlying asset with your trade, then your derivative should also go this way!